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The three key steps of retirement planning involve calculating expenses (current, future and emergency), accounting for inflation rates and knowing how early or late you plan to retire to estimate your life expectancy.
Retirement planning is a systematic way to determine how much money you need to maintain your current standard of living through your retirement years when you no longer receive a monthly paycheck.
It involves calculating your current and future expenses, accounting for any financial emergencies, current assets and liabilities, and determining when to retire – while considering inflation rates.
These factors combined together help give you a solid idea of how much your overall retirement corpus should be. We have offered a more detailed explanation of these points below in our blog, so read on to find out more.
How to Calculate How Much You Need To Retire
Step 1: Calculate Your Expenses
You can also use the retirement calculation formula given below, using your current expenses to estimate your retirement income needs:
Current Expenses = Current Income - Current Savings |
For example, if your annual income is ₹15 lakhs and you save ₹3 lakhs every year, your current expenses amount to ₹12 lakhs.
- You can start by listing your current expenses and omitting expenses that will no longer apply during retirement. This could be expenses like any loans/debt or children’s educational expenses you will have paid off by then.
- Next, account for any early retirement activities like travelling, sightseeing and other bucket list expenses you plan to engage in.
- Also, set up an emergency fund to account for any unexpected expenses during retirement, like medical emergencies.
- Your withdrawal rate is a significant factor in determining if your retirement savings will last. Having an accurate estimate of your expenses after retirement is critical because it will affect how much you withdraw each year and how you invest in your savings.
If you understate your potential expenses, you may easily outlive your savings, or if you overstate your expenses, you may not be able to maintain your current lifestyle during retirement.
Step 2: Factor in Inflation
Inflation is the biggest hurdle you need to overcome when calculating retirement savings.
Your money today will not hold the same value in the future. Hence, future living expenses may be higher or different post-retirement.
For example, if you are 30 years old, have an average annual expense of ₹5 lakhs and plan to retire within the next 30 years (at 60 years). With an inflation rate of 6.67% p.a. (India’s inflation rate in 2022), you would need around ₹34.6 lakhs per year to maintain your current lifestyle.
To make this estimation easier, you can use an Inflation calculator to estimate your retirement income needs. This is a free online tool that can help you factor in inflation without going through lengthy manual calculations.
Step 3: Factor in Life Expectancy
Thanks to modern medicine, the average life expectancy of modern Indians has invariably increased, averaging at around 70 years. Per the UN’s projections, this average is expected to increase to 80 years by 2100.
Moreover, people living in urban India have easy access to technology, the internet and the latest healthcare services. To make sufficient financial provisions for an extended life, you need investment tools that will help your money grow faster than the inflation rate.
Most people invest in mutual funds or other market-linked instruments2 to grow their portfolios. Some also buy retirement plans from insurers like Tata AIA that offer a monthly pension once you retire.
Conclusion
Retirement planning is a lifelong process. This is because your needs, income, and circumstances will change as you age. Therefore, your financial plan must be flexible enough to account for these changes to ensure you estimate an accurate amount to save up for retirement.
One popular retirement planning option most people use to passively secure their retirement corpus is through retirement/pension plans from online insurers.
